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Report on the Implementation of the Investment Policy Review Egypt

United Nations Conference on Trade and Development

REPORT ON THE IMPLEMENTATIONOF THE INVESTMENT POLICY REVIEW

EGYPT

UNITED NATIONSNew York and Geneva, 2006


Note

UNCTAD serves as the focal point within the United Nations Secretariat for allmatters related to foreign direct investment and transnational corporations. Inthe past, the Programme on Transnational Corporations was carried out by theUnited Nations Centre on Transnational Corporations (1975-1992). UNCTAD’swork is carried out through intergovernmental deliberations, research andanalysis, technical assistance activities, seminars, workshops and conferences.

The term “country” as used in this study also refers, as appropriate, to territories orareas; the designations employed and the presentation of the material do notimply the expression of any opinion whatsoever on the part of the Secretariat ofthe United Nations concerning the legal status of any country, territory, city orarea or of its authorities, or concerning the delimitation of its frontiers or boun-daries. In addition, the designations of country groups are intended solely forstatistical or analytical convenience and do not necessarily express a judgementabout the stage of development reached by a particular country or area in thedevelopment process.

The following symbols have been used in the tables:

Two dots (..) indicate that data are not available or are not separately reported.Rows in tables have been omitted in those cases where no data are availablefor any of the elements in the row;

• A dash (-) indicates that the item is equal to zero or its value is negligible;

• A blank in a table indicates that the item is not applicable;

• A slash (/) between dates representing years, e.g. 1994/95, indicates a financialyear;

• Use of a hyphen (-) between dates representing years, e.g. 1994-1995, signifiesthe full period involved, including the beginning and end years.

Reference to “dollars” ($) means United States dollars, unless otherwiseindicated. Annual rates of growth or change, unless otherwise stated, refer toannual compound rates. Details and percentages in tables do not necessarilyadd to totals because of rounding. The material contained in this study may befreely quoted with appropriate acknowledgement.

UNCTAD/ITE/IPC/2006/1

Copyright © United Nations, 2006All rights reserved

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Investment Policy Review Series

1. Egypt

2. Uzbekistan

3. Uganda

4. Peru

5. Mauritius

6. Ecuador

7. Ethiopia

8. Tanzania

9. Botswana

10. Ghana

11. Lesotho

12. Nepal

13. Sri Lanka

14. Algeria

15. Benin

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Contents

1. Introduction ................................................................................ 1

2. Summary of findings .................................................................. 1

3. Implementationof recommendations on the investment ....... 3frameworkFDI entry ....................................................................................... 3Establishment and operation ........................................................ 3Protection and treatment of FDI .................................................... 5General measures ........................................................................ 6

4. Implementation of recommendations on investment ............. 9promotionChanges in the mandate, resources and capabilities of GAFI ....... 9Developing an investment promotion strategy ............................. 10Upgrading the Free Zones ........................................................... 13Enhancing the role of local institutions ....................................... 14

5. FDI attraction performance ..................................................... 15

6. Conclusion ................................................................................ 17

Figure 1. Average growth of FDI stock, 1998 and 2004 ........................ 16

Table 1. Summary of implementation achievements: investment ........ 18framework

Table 2. Summary of implementation achievements: investment ........ 19promotion

Annex GAFI One-stop Shop ............................................................. 21

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Report on the Implementation of the Investment PolicyReview of Egypt

1. Introduction

Egypt's Investment Policy Review (IPR) was issued in 1999. It was oneof the earliest IPRs to be conducted and formulated recommendations on howto improve the country's investment framework, investment promotion effortsand strategies to attract and benefit from foreign direct investment (FDI).

In January 2005 the Government of Egypt invited UNCTAD to assessthe extent to which the IPR recommendations had been implemented. Amission to Egypt was conducted in February 2005 and the findings arecontained in this Implementation Report. This report was prepared by RoryAllan and Fiorina Mugione under the direction of Taffere Tesfachew andKhalil Hamdani. A preliminary version of this report was submitted to, anddiscussed at, the Commission on Investment, Technology and RelatedFinancial Issues on March 2005.

2. Summary of findings

The IPR reported on conditions in 1998 and this has been taken as thebase year from which to assess the extent of changes. In summary, thekey findings are:

• On the investment framework, the majority of the policy recom-mendations have been implemented, particularly in the past two years.In some cases, reforms have surpassed expectations. Reform ofadministrative procedures and processes have only recently beenlaunched and it is still too early to know whether they can be fullyimplemented and sustained and, crucially, whether improvedgovernance can be inculcated throughout the large governmentbureaucracy, including in the regions.

• On investment promotion, the recommendation has been adopted totransform GAFI, Egypt's investment agency, from a regulator to aninvestment promoter and facilitator. The initial effort adopted a prag-matic and sensible focus on improving investment facilitation andafter care. The formulation of an investment attraction strategy and

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1 UNCTAD (2005). World Investment Report. Transnational Corporations and the Internationalization ofR&D. United Nations publications Sales. No.E.05.II.D.10.

capacity was at the heart of the government's agenda for 2005.

• FDI performance has been weak over the period even taking intoaccount external factors such as the Asian financial crisis and therecent slowdown in global FDI inflows. Egypt's FDI data is unreliableand may understate FDI inflows. Efforts are under way to improveFDI statistics and reliable figures should be available before the endof 2005. The Central Bank of Egypt has adopted the internationalguidelines for FDI data collection and it is revising the balance ofpayments statistics series. According to the World InvestmentReport, FDI in Egypt totalled in 2004 a record $1.2 billion1. Newinvestors are showing increasing interest in investment opportunitiesand those investors who invested in the country before 1998 havedramatically increased capacity.

The new government, appointed in mid-2004, is spearheading efforts toaccelerate the pace of reforms of the investment framework. A Ministry ofInvestment was created within the new government and this is injectingadditional dynamism into investment-related policies and institutions. A newmanagement team has been appointed to the General Authority forInvestment and Free Zones (GAFI).

A checklist of initiatives shows a strong implementation record. One of thenoticeable changes since 1998 is that the current government is listeningmore carefully to investor concerns and acting more quickly on them.Moreover, a vision may be taking hold among legislators and policymakersthat will lead to groundbreaking changes in the relationship between thepublic and private sectors, thereby enabling private investment to flourishand bring benefits to Egypt. In short, therefore, an impressive agenda hasbeen formulated and a remarkable degree of leadership is now at work toimprove investor conditions and to enhance the flow and benefits of FDI.

Of course, many of the regulatory and institutional reforms that havebeen introduced are designed to enable Egypt to catch up with goodpractice elsewhere. Alternative locations for FDI have not stood still since1998. Egypt has slipped in the World Competitiveness Report rankingsfrom 40th in 1998 to 62nd in 2004. However, it ranked 53rd in 2005. Someestablished and new investors have found Egypt sufficiently competitive tosubstantially increase their manufacturing export capacity.

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3. Implementation of recommendations on the investment framework

FDI entry

Some formal restrictions on FDI entry have been eased since 1998.The 49 per cent ceiling on foreign ownership in commercial banking andinsurance has been abolished. Major international banks such as CCF,HSBC, Crédit Agricole and Barclays have begun to make their presence onEgypt's banking scene. Major insurance companies such as Allianz, amongothers, have also entered the insurance market. Some professionalservices are a closed shop and foreign investment is restricted in importagencies and distributorships. Restrictions noted in the IPR on foreignownership of agricultural land were abolished in 2005.

Apart from those exceptions, almost all Egyptian commercial activitiesopen for private investment are also open to FDI. State enterprises are stillquite pervasive, but in most sectors do not operate to the exclusion ofprivate, including foreign, investment. In the absence of an FDI law, noofficial information is available as to which activities are restricted to foreigninvestors, probably because there are so few restrictions. The forthcomingFDI policy statement should assist. No formal and explicit screening offoreign investment is undertaken by GAFI as part of its company establish-ment procedure (see below).

Establishment and operation

Conditions for business start-ups have improved since 1998 followingrecommendations in the IPR. The fundamentals have not changed but theyhave been speeded up. GAFI now performs registration procedures for bothLaw 159 (non-incentive) and Law 8 (incentive) companies, as recommended.In January 2005, GAFI opened a fully-fledged one-stop shop to facilitateestablishment procedures as recommended in the IPR. As of July 2005, ithad also opened other branches for its one-stop shop in Alexandria, andthree more will follow elsewhere in the country. The number of proceduralsteps has been reduced, computer systems have been introduced, and insome instances existing regulations have been eased to enable acompany to begin operating pending security clearance. GAFI recordsshowed that over a period of one month, the average amount of time it tooktime to register a company was three days. In 1998 the procedure couldtake anything between one and six months. This is impressive, given thatthe Law 8 company registrations also entail screening of eligibility for fiscalincentives.

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GAFI's one-stop shop includes representation from many governmentagencies thereby facilitating regulatory permits and approvals. In other cases,GAFI merely receives and distributes applications to other agencies. GAFIhas encouraged these agencies to set up units within the one-stop shop,which are fully empowered to grant approvals. Of course, there are somepermits are more complex and the processing needs to be done in theparent ministry. The table in Annex 1 shows the representation in GAFI andwhether approvals can be given in-house.

The changes are quite recent, but should, in short order, dramaticallyreduce business start up time. Given the current rate of progress there isreason to expect that there will be further streamlining of procedures,including of those directly controlled by GAFI.

The one-stop shop has only just been established and GAFI officialsindicated that it would be completely operational by the end of 2005. Thereis still much to do including:

• Replicating the one-stop approach in GAFI offices outside Cairo; and

• Developing an outreach programme in the key regulatory ministriesand regions not touched by the one-stop shop. These include landacquisition and property development, which entail major registra-tion and permitting delays.

Privatisation had been slower than expected until 2003 and theGovernment had not entirely withdrawn from investing in new businesses.There were 16 per cent fewer privatisation transactions in 1999-2003 than inthe previous six years and the value of sales proceeds fell by nearly 30 percent. However, since 2003, transactions involving sales to strategicinvestors have accelerated and include a number of acquisitions by foreigninvestors, notably in the cement industry. Total proceeds tripled in 2004-2005, and totalled 9.8 billion Egyptian pounds.

Yet many companies remain in State ownership. These include importantservices such as fixed line telecommunications, electricity, gas distributionin which State ownership has precluded direct private investment. Manyreasons have been put forward for the slow pace of privatisation, theseinclude the prospect of large job losses, the daunting re-investmentrequirements for modernisation, the setting of unrealistic reserve prices,the wish to retain control over 'strategic' industries, and, in some cases,the need for prior regulatory reform. Undoubtedly, these are complex issuesand deep adjustment problems have been generated by decades of

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widespread state domination of large sections of industry and services.

Privatisation is now the responsibility of the new Ministry of Investmentand is being vigorously re-launched with more flexible procedures and a 'nosacred cows' approach. A total of 175 companies have been designated forprivatisation (54 in 2005) and will, where suitable, be sold to strategicinvestors. No restrictions will be placed on FDI in these transactions. Moreflexible and market-oriented valuation procedures will be applied. Thegovernment will absorb more restructuring costs and fiscal incentives willapply. The government has announced (3 March 2005) that it will divestitself of its stakes in all joint venture companies and joint venture banks, aswell as its ownership of a public petroleum company and an insurancecompany (privatization of Bank of Alexandria and Telecom Egypt has beenannounced). By the end of 2005, the government's privatisation record willhave markedly improved; this is reflected in a key sector, the petrochemicalindustry where the government continues to invest purely in distributionactivities. It has been made clear to private investors that State minorityparticipation will be mandatory before access to feedstock will be possible.This activity may undercut the ultimate objective of the privatisationprogramme.

Protection and treatment of FDI

The IPR reported no contentious issues in the protection and treat-ment of foreign investors. By 1998, 62 bilateral investment treaties (BIT)had been signed and another 22 have been added since. However, itappears that only 18 of these treaties have entered into force (one since1998). No explanation has been given for this. There have been noexpropriations of foreign investment since 1998. Some investor-statedisputes have resulted in international arbitration cases. One intervieweeoperating in a regulated sector reported that the government had fullyhonoured its market-related undertakings.

On a more general note, the ministerial-level investor complaintscommittee proposed in 1998 has indeed been activated and has met 25times in the intervening period. This committee was given legislativebacking in 2004 and its decisions were declared to be binding on govern-ment agencies. GAFI was also given the legal authority in 2004 to form aninvestor conciliation body, headed by a judge. Apart from these formalmechanisms, a striking feature of the present government is its accessibilityand its willingness to listen to and act upon concerns raised by investors.

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General measures

In taxation, several extensions have been made to the direct and indirecttax incentives introduced in Law 8 of 1997:

• The list of eligible activities was extended in 2000.

• The incentives were extended in 2003 to include acquisition of existingbusinesses through privatisation in return for the new investorundertaking training and R&D.

A more fundamental and important reform has been introduced thatintroduces a sharp reduction in tax holidays in activities and areaspreviously exempted by law no. 8 and a simultaneous lowering of uncom-petitive general rates of corporate taxation. This applies to companiesestablished after the enactment of a new tax law. The standard corporatetax rate is likely to be reduced from 42 to 20 per cent. This is a welcomedevelopment as it will enable all investors to operate in a competitive fiscalregime. Detailed tax policy changes were not addressed in the IPR in 1998,but were reviewed in the context of this evaluation exercise.

This change in business tax policy represents a landmark of the reformprocess. It offers competitive arrangements to all investors and reduces thescope for unnecessary and discretionary exemptions and intrusivecompliance procedures. It seems likely that an exception will be made forthe free zones. They will continue to offer lifetime tax holidays to new investors.If this exception leads to others, it may in due course undermine thelandmark nature of this reform.

The IPR reported problems with customs administration and singled outthe poor implementation of customs duty drawback for export investors.The operation of the drawback scheme was improved in 2002 by centralizingfunding and administrative control in a single agency, the Export and ImportControl authority. More generally, important reforms have begun. Tariff rateshave been reduced from a weighted average 14 to 9 per cent and the plethoraof tariffs bands reduced to six, which will simplify customs' assessments.Reforms in customs' procedures themselves have been implemented bythe administrative authority, aided by strong ministerial oversight in thecurrent government. A new law will be issued shortly to institutionalize thesearrangements. Based on the detail provided by the government, it is clearthat this regulation will remove red tape related customs duties andprocedures. Work will now begin on all-important management and organi-zational reforms in the customs' administration.

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Most investors interviewed for this report have already remarked anoticeable improvement in customs' clearance times. One investor reportedthe improvement as a 'miracle' and another is planning to reduce its customsclearing staff from 20 to 3-4. However, the change is less noticeable forsmaller investors who have less administrative resources and less cloutwith the government. Thus, the improvements are not yet systemic.

The IPR did not identify corporate tax administration as a seriousissue although at the time around 200,000 disputed tax cases were beforethe courts. These disputes often arose from what all investors intervieweddescribed as highly arbitrary tax assessments. The problem appears tohave worsened, as there may now be over 300,000 disputed tax cases incourt. Details were provided of comprehensive reforms in complianceprocedures that have been enacted as law by the Parliament in 2005. Thenew law will enable the tax authorities to take a more focussed and lessarbitrary approach, will introduce an independent appeals system andappoint a watchdog to safeguard taxpayers' rights. An amnesty is plannedto clear the backlog of pending cases.

Foreign exchange arrangements have surpassed expectations in theIPR. The requirement for exporters to surrender 75 per cent of their foreigncurrency proceeds was lifted in December 2004; in January 2005 Egyptalso accepted the IMF Article VIII obligation to maintain current accountconvertibility. This sets the seal on a series of sustained reforms to adopt amarket oriented approach to fixing exchange rates and introducing stablemacroeconomic policy to underpin currency convertibility.

Labour regulation was overhauled through the introduction of a unifiedLabour Law in 2003. Historically, government permission has beenrequired for companies to lay off workers. Although eased and not notablyburdensome in practice, a certain degree of inflexibility in terminationprocedures is still apparent. However, the government must provide appro-priate grievance procedures.

Work and residence permits for the employment of non-Egyptians arenow easier to obtain. Previously, rules were liberal but approvals could beslow. GAFI's one-stop shop incorporates representatives of the relevantauthorities and they claim that issuing delays have been reduced. Forexample, new work permits can be issued in 48 hours and renewals in 24hours. Provided that foreign workers do not account for more than 10 percent of total employment the principal check is on the credentials of theemployee. GAFI is empowered to issue an entry visa on the spot once a

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work permit is approved.

A competition law was being prepared in 1998. A new law, includingmerger provisions, was passed by Parliament in January 2004, andpromulgated on 16 June 2005, and a new competition authority has beenestablished. However, as key implementation regulations have yet to beintroduced, it was not possible to examine the country's competition law.

A new intellectual property protection law was issued in 2002(82 of 2002), somewhat later than the forecast date of 2000. The new lawis designed to be TRIPS compliant and gained a positive peer review atthe WTO. Furthermore, Egypt's conclusion of trade agreements hassurpassed the expectations of the IPR.

Longstanding negotiations of a partnership agreement with theEuropean Union were concluded in 2004, enabling Egypt to secure a freetrade agreement with its most important export market.

The 1997 Greater Arab Free Trade Agreement (GAFTA) free tradeagreement between 17 Middle Eastern states to eliminate progressivelytariff and non-tariff barriers has been implemented ahead of time (2005instead of 2007), at least in respect of tariff barriers. Attention will nowfocus on reducing barriers to trade in services. Some academic researchsuggests that the gains to Egypt from domestic services liberalisation arisingfrom GAFTA would exceed those from goods and that FDI would beparticularly beneficial in such a liberalisation. The ultimate goal is creationof common market. As yet there is no firm timetable for addressing regionalinvestment.

Not anticipated in the 1998 report was Egypt's negotiation of a system of'Qualifying Industrial Zones' (QIZs) with the United States. These will allownon-reciprocal duty and quota access to the US market from seven areaswithin Egypt provided products contain sufficient Egyptian and Israelicontent. They will be especially attractive to the textiles and garments'industry. Hundreds of investor enquiries from both home and abroad weregenerated within days of the recent announcement on the QIZ scheme.

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4. Implementation of recommendations on investment promotion

Changes in the mandate, resources and capabilities of GAFI

The IPR recommended that GAFI's foreign investment promotion rolebe strengthened. This would entail both a reorientation of its mandate froma regulatory authority to a promotional agency and more active investmentgeneration as well as improved investor facilitation, business support andafter care services.

The Government's approach has been pragmatic and focussedinitially on improving investment facilitation and after care to removeimpediments caused by the country's cumbersome administrativeprocedures. Measures include:

• The creation of a Ministry of Investment bringing together thePublic Asset Management programme, the General Authority forInvestment and the Free Zones (GAFI), the Capital Market Authority,the Cairo and Alexandria Stock Exchanges, the Mortgage FinanceAuthority and the Egyptian Insurance State Authority (EISA). TheMinistry set performance targets on planned reforms and track theirpace of implementation. Quality performance targets have yet to beestablished, but they are under review.

• Re-orientation of GAFI: The mandate of GAFI has been changedby the enactment in 2004 of a new chapter to Law no.8 (chapter 4)on facilitation of investment procedures and the issuance of aPresidential decree (no. 316 of 2004) to regulate its functioning. ThePresidential decree provides for the appointment of a new Chairmanand three deputies or Vice Chairmen each with specific responsibilities,appointed for one year, renewable. There is an enlarged board of 12members, with membership of the three deputies and of nine inves-tors and other experienced persons. Today the majority of the Boardis from the private sector as recommended in the IPR. GAFI alsoestablished a board of trustees including representatives of investors,exporters and entities providing services to investors. This boardreviews investment problems and ways of solving them, and givesadvice to GAFI on investment promotion. GAFI is beginning to makea smooth transition from a regulatory body to a facilitation andpromotional agency. To date, it has redeployed key staff andrecruited new staff at the managerial and at lower levels to inject therequired skills in investment promotion. Staff has received some

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training, mainly through mentoring, but there are clearly still unmetneeds for developing required skills. As of June 2005, GAFI enteredinto a long-term agreement with MIGA to provide the technicalassistance needed by GAFI.

• The establishment of GAFI one-stop shop for welcoming investorsand for facilitating entry and establishment procedures. GAFI openedoffice in a new building hosted together with the office of the Ministryof Investment. The new office facilities are excellent and consti-tute a welcoming front end dealing with investors, while remainingstaff at the back office only engage in support activities. The one-stop shop began operating in the Cairo head office in December2004, and a new office was opened in Alexandria in 2005 and willsoon open in the three other GAFI offices in Assiut, Giza and Ismailia.It is also planned to use partner agencies at the governorate level asoutlets connected to GAFI's main offices to facilitate businessestablishment throughout the country. The one-stop shop featuresan attractive layout beginning with a welcome centre staffed withmultilingual assistants and three legal counsellors. Other areas houserepresentatives of the key regulatory agencies. A GAFI staff memberis assigned to walk the investor through the entire process. GAFIlegal and sectoral advisors are available in the premises. 60-80queries per day are being received from local and foreign investors.The one-stop facilities are very recent and have not yet extensivelyadvertised. They should become a promotional tool and generateinformation of speedy processing times to be used in promotionalmaterial.

Developing an investment promotion strategy

The IPR recommended that Egypt's investment promotion strategyshould build on the country's competitive strengths and aim to attract newtypes of investment that will enable Egypt to better integrate into the globaleconomy. In light of this recommendation, it was suggested that it wouldbe opportune to involve the private sector in a thorough review of theincentives framework, and to give higher priority to creating an enablingenvironment for FDI, including the physical, technological and educationalinfrastructure.

In addition, the IPR suggested that a key strategic objective should beto upgrade FDI in Egypt by orienting it more towards higher value addedproduction. For upgrading, after care services to established investors were

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singled out as of paramount importance.

Work has begun on a master plan on investment promotionstrategy. Supported by MIGA, this work will consist of establishing astrategy and undertaking research leading to FDI targeting by creating in-vestment packages around potential opportunities in new sectors, andmarketing investment opportunities in Egypt. It will include direct assistanceto GAFI to develop and implement investor facilitation and servicingprogrammes coupled with intensive staff training and assistance indeveloping information material. Coordination on targeting sectors will alsobe conducted with the Industrial Modernization Centre (IMC) of Egypt.

The after-care functions have already been assumed by the newlyestablished GAFI Investors Relations Unit, headed by a new managerand his staff. The unit is mandated to maintain an investor tracking systemto follow up on issues raised by investors and to help with problem solving.A research function is being set up for policy advocacy, as well to monitorall procedures facilitation. The unit will also develop sector analysis to assistin targeting existing investors to reinvest and upgrade, to build linkageswith local firms and, where feasible, to expand production from the local tothe regional and global market. Support to existing firms is considered apriority, as it can be an important source of additional investment, eitherthrough sequential investment or through a positive signal to potentialinvestors. The following promotional tools are being developed:

• Investment information. Under the law, GAFI is mandated tocollect, provide and update investment data and information and toregularly disseminate quarterly bulletins via local branches, Internetwebsites, and offices abroad. Efforts are under way to improve datacollection and analysis. To this end, GAFI is implementing an Inte-grated Information Investment System. Phase 1 will link GAFI withall of Egypt's 7 Free Zones and Phase 2 will link Egypt's 40 industrialzones to GAFI. GAFI will also provide more insights on FDI in Egyptaccording to generated employment, exports, sector and type ofactivity to facilitate the targeting of specific functions. Informationmaterial on the project is being distributed at the one-stop shop, butthis material needs to be updated. Printed promotional material hasbeen produced annually by GAFI since 1998 and improvements havebeen made in the quality and presentation of this material. Effortsare under way to regularly provide investors with timely and accuratemarket intelligence.

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• Websites. The Ministry of Investment (http: www.investment.gov.eg)undertook a very good initiative to launch an Investment Portal, whichhas been online since January 2005, and was upgraded in thesecond half of 2005. The Investment Portal website portal shouldseek contributions from GAFI and other stakeholders to advertisethe one-stop shop, and provide a flow chart on how to invest inEgypt and key investment opportunities. GAFI and investors' asso-ciation should regularly feed the portal with investment news andcase studies showcasing success stories. The portal should havemore links to other websites featuring specialized investment oppor-tunities, and should provide online forums on special topics, andimprove on problem solving. The portal has a good search facility.However, the registration and business matchmaking are not yetuser friendly. GAFI (http://www.gafinet.org) has a website that isavailable in seven languages. This multilingual approach is uniqueand the site design elements are simple and easy to use. Theorganization of information is straightforward and consistent.However, there is little information content, and generally it needsupgrading or merging with the main investment portal.

• Promotion abroad. Seminars on investment in Egypt in targetedforeign capitals and cities have been held on a regular basis; theseseminars have been sponsored by GAFI, the Ministry of ForeignAffairs and/or business associations. Special advertising sections innewspapers and magazines, and special TV features on economicperformance have been shown by CNN. However, these initiativeshave not been undertaken in a coherent manner for consistent brandingand targeted FDI promotion. The IPR had suggested that GAFI shouldconsider locating investment promotion offices in a number of keylocations abroad and to work with other ministries. GAFI has openedan office in London in collaboration with a local business association.An assessment of performance is under way to improve its functioningand take stock of this experience before looking into new initiativesof this kind. GAFI has cooperated with the Ministry of Foreign Affairsin promotion activities abroad. Two training courses for diplomatswere held in 2000, with the participation of trainers from outwardinvestment agencies that operate marketing programmes abroad.Plans are in hand to scale up activities in the near future. In August2005, GAFI planned a branding campaign with the internationaladvertising agency Fleishman Hillard.

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Upgrading the Free Zones

The IPR observed that free zones had benefited from investmentfacilitation measures, including tax and tariff incentives, and to some extentfrom basic infrastructure. The report pointed out that existing zones had notbeen very successful yet the government was proposing new zones, and theIPR questioned this initiative. In fact, despite special incentives, free zoneshave, in the past, been less successful than other industrial zones inattracting investment projects. Free zones attracted a larger share offoreign capital in terms of equity participation (34 per cent, compared to 22per cent inland), but most of the projects were small scale and had lowerinvestment costs. More than half of the approved projects were related tostorage facilities and warehouses, and many of the approved projects had alow or slow implementation rate. The IPR recommended that priority shouldshift from creating new zones to focusing resources, energy and time onexisting free zones.

In general, free zones are now more successful in creating investmentopportunities based on labour force availability, strategic location andincentives for export-oriented projects. However, since 1977, three new zoneshave been established and two more are being planned. Incentives havebeen attractive to investors and the free zones have been demand driven.They have, in fact, raised occupancy to almost 80 per cent in the twolargest zones (Alexandria and Cairo) and close to 60 per cent in the fiveother already operating free zones. The nature of projects has also changedsince 1997: export manufacturing now accounts for the largest share ofexisting projects, as opposed to storage facilities which have decreased.

The IPR suggested upgrading the infrastructure in existing areas andthat some free zones should evolve into technology parks and/or industrialparks. The IPR also suggested that upgrading free zones would require notonly a more sophisticated infrastructure, but also the establishment of aprivately-operated 'centre of excellence' in business services. The rationalebehind this was that industrial capability could be upgraded to producehigher value added products with competitive price internationally, therebyenhancing Egyptian exports. Other countries with outstanding EPZperformance (Taiwan, Republic of Korea and Dubai) have strong backwardlinkages, particularly with regard to services within the zones and privateoperations and management. Egyptian zones are missing some servicesfacilities such as health and medical services, banks, telecommunication,recreation. However, there has been some progress in the range of servicesoffered in the zones.

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In addition, since 2001, 16 people at GAFI have been assigned to pro-mote the zones, and their number is expected to rise to 35. GAFI staffhave been trained to produce information and to offer customized servicesto investors and are now providing full assistance to potential investors,arranging for site visits and for the interaction with local authorities. In addi-tion, specialized material has been produced giving information on the dif-ferent zones. There have been a few targeted missions to raise investors'interest. Investment targeting to the zone to develop linkages andhorizontal clusters has given limited results. Most of the zones attract awide range of manufacturing industries; one zone, however, is fullyspecialized in media and another in pharmaceuticals. No data are availableto estimate the cost per job created, nor on know-how transfer in the FreeZones and on opportunities to strengthen backward linkages that couldhave a catalyst effect stemming from the Free Zones. Business linkageswith local firms have, in some cases, been developed but GAFI washardly involved in creating these linkages.

Enhancing the role of local institutions

The IPR raised specific issues related to attracting investment in the newcities. It suggested the setting up of local development agencies as a catalystto attract investment to new cities, focusing on local strengths and aggres-sively promoting the unique features of their location to foreign investors.

Today, decentralisation is a crucial aspect of reforms, and streamliningand improving the administration of the country's governorates will be lookedinto in order to provide more efficient services to investors. In the area ofinvestment promotion, there are six governorates directly linked to GAFIthrough a common investment promotion office. However, all governoratesare being solicited to ensure that the investment strategy is included intheir regional development plan. In addition, the Ministry of Investment isseeking the participation of governorates in the development of the masterplan for investment promotion strategy, as well as to provide technicalsupport in the form of templates and advisory services locally. Abenchmarking exercise has been conducted to produce Regional InvestmentMaps, a project supported by GAFI. It is felt that some governorates areproactive in investment promotion, while others lag behind; monthlymeetings are held between the Prime Minister and Governors to troubleshoot problems and bring them on board. Egypt's new cities and industrialestates are also involved, and many of them have active investors' associa-tion that have played, and continue to play, a useful role in promotinginvestment in their locations.

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5. FDI attraction performance

It seems likely that Egypt has, and continues to, under-record FDIinflows. This bias has been consistent over time and growth rates of FDIcan thus be validly compared (see Figure 1). By this measure, the growthrate of FDI stock between 1998 and 2004 shows that Egypt hasunderperformed in attracting FDI. This goes beyond the general weaknessesassociated with the fall-out of the Asian financial crisis and the more recentglobal slowdown.

Official figures suggest that FDI inflow has averaged around $739million dollars annually since 1999. These are low inflows for a country ofEgypt's size and potential. In 2005 better data were available and thesefigures have been revised upwards. In 2004, FDI inflows totalled $1.2 billioncompared to $237 million in 2003. Examples of significant developmentsand expansions were noted in the fact-finding mission, which suggest thatthe FDI scene has been very vibrant:

• Upstream oil and gas exploration and development involvingpetroleum majors such as BP, Royal Dutch Shell and Devon Energy.

• At least two major gas liquefaction projects have been launched withthe participation of Union Fenosa (Spain), ENI, Petronoas, BritishGas and Gaz de France.

• Since 1998 around 25,000 hotel rooms have been added by foreigninvestors, including in joint ventures.

• The massive Sokhana hub port and logistics complex has beeninitiated.

• CCF, HSBC, Crédit Agricole and Barclays have expanded theirbanking investments.

• Two manufacturers have increased capacity to a world scale since1998 and now have significant market shares in Europe, thesemanufacturer's are:

- Alexandria Carbon Black (ACB), in which the strategic investor isP.T. Indo Bharat Rayon of India, has tripled capacity and the world'slargest plant of its kind is in Egypt.

- Lecico, the sanitary porcelain manufacturer has expanded capacitydramatically (by 25 per cent in 2004 alone), and has the largestsingle production facility in this industry in the world.

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Figure 1. Average growth of FDI stock, 1998 and 2004(in per cent)

Source: UNCTAD, WIR 2005.

0 10 20 30 40 50

South East Europe and CIS

Developed countries

North Africa

Latin America and the Caribbean

Developing countries

South, East and South-East Asia

China

Egypt

1998-20041998-2004

16


6. Conclusion

On improving the investment framework, the government's track recordcompared against the recommendations in the IPR is impressive. Table 1summarizes the implementation record: Of the number of recommenda-tions made:

• The majority of recommendations have been fully or largely achievedor surpassed.

• Another quarter of the recommendations have been partiallyimplemented.

• Only a small number of areas have seen no change or have experi-enced a reversal.

If the momentum for change under the new government is maintained,it is likely that over 80 per cent of recommendations will be achieved by theend of 2005. This 'scorecard' must be read in conjunction with two importantsupplementary notes: the first, and positive note, is that improvements inthe investment framework are not piecemeal improvements but form part ofa comprehensive Egyptian reform agenda; the second note, a caution, isthat the reforms involving the administrative machinery are quite recent andrequire an enormous programme of management reform and retraining ofthe civil service before they will be entrenched and sustainable.

17


Table 1. Summary of implementation achievements:investment framework

Recommendation Result Comment

Key to table: surpassed expectations fully or largely accomplishedpartially accomplished no change or reversal

Ease FDI entry in banking andinsurance.

Expand BITs network.

Accelerate privatisation.

Establish GAFI one-stop shop.

Speed up and simplify businessestablishment.

Activate high level investorcomplaint body.

Improve tax administration.

Improve customs administration,including duty drawback.

Remove foreign exchange re-strictions.

Ease labour termination.

Improve foreign staff permitting.

Introduce modern IP law.

Introduce competition law.

Expand trade agreements.

GAFI has authority to register lawno. 8 and law no 159 companies.

Many BITs signed but not in force.

Slow progress, but very strongrecent relaunch.

Impressive start, but not yetbedded down.

Some unnecessary proceduresremain, changes are needed incommercial law.

Given legal backing with enforce-ment powers and supplementedby a GAFI conciliation body.

Await new law with moderncompliance approach; manage-ment reform to start.

Compliance procedures vastlyimproved aided, inter alia, by tariffsimplification, managementreform pending.

Market based exchange rate, fullexporters’ retention, IMF conver-tibility undertaking.

Not addressed in new 2003 law.

Foreign hiring quota formalisedand in-house approval availablein one-stop shop.

Introduced new law in 2002, desi-gned to be fully TRIPS compliant.

Law and regulations not promul-gated. Authority not established.

New agreements with EU, Arabcountries and qualifying zones forUS access.

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On investment promotion: Most of the recommendations have beenfully or largely accomplished. This review has found that the new govern-ment is committed to promoting investment opportunities and has begun tointroduce a 'Team Egypt' approach. This is all in direct contrast to the pastwhen economic reformists and ministers advocating a more protected,State-run economy were at loggerheads on the way to move forward.Despite a slow start after 1998, recent performance has been strong, whichis very encouraging for the future.

Table 2. Summary of implementation achievements:investment promotion

Recommendation Result CommentChange the mandate of GAFItowards an investment promo-tion and facilitator.

Implement GAFI's new strategyon investment facilitation, busi-ness support and after care serv-ices.

Develop an investment promo-tion strategy.

Use new information technologyto upgrade information, producenew information material.

Open investment promotion of-fices in a number of key locationsand collaborate with other minis-tries and agencies.

Limit the number of free zones.

Upgrade FDI in the free zones.

Decentralize investment promo-tion.

Decision made to transformGAFI. Implemented changes inthe board, redeployment and re-cruitment of new staff.

Positive initial focus on invest-ment facilitation and after care.

Started recently, a prime focus in2005.

Partly achieved but lacks newtools to monitor new FDI flowsand capacity expansion.

Partly achieved and undergoingreassessment after first expe-riences.

Too many new zones have beenestablished.

Suggested upgrading partlyachieved but shifting to privatemanagement did not take place.

Good start in involving gover-norates in the preparation of themaster plan and investment maps.

Key to table: surpassed expectations fully or largely accomplishedpartially accomplished no change or reversal

19


Annex: GAFI One-stop Shop

Business licensing representation within the one-stop shop

Ministry Agency / Function

Ministry of Supply and InternalTrade




Ministry of Justice

Ministry of Finance

Ministry of Finance

Ministry of Finance

Ministry of Foreign Trade and Industry






-

Ministry of Interior

Ministry of Interior

Ministry of Health and Population

Chamber of Commerce

Commercial Registry

General Authority for JewelStamps and Weights

Control and DistributionDepartment

Public Notary

Income Tax Office

Sales Tax Office

Customs Office

General Organization forIndustrialization

General Authority for Stand-ardization

Industrial Control Authority

Chemistry Administration

Foreign Trade Administration

Import & Export ControlAuthority

Lawyer Syndication

Passport Department

Committee of Explosives

Executive Bureau for Protec-tion from Ionised Radiation

Yes

Yes

LiaisonOfficer

Yes

Yes

Yes

Yes

LiaisonOfficer

Yes

LiaisonOfficer

LiaisonOfficer

LiaisonOfficer

Yes

Yes

Yes

Yes

LiaisonOfficer

LiaisonOfficer

In-houseapproval?

21









Ministry of State For EnvironmentalAffairs

Ministry of State for Scientific Research

Ministry of Petroleum

Ministry of Petroleum

Ministry of Local Development

Ministry of Culture

Ministry of Culture

Ministry of Culture

Ministry of Agriculture




National Institute for Nutrition

Administration for PrivateMedical Care

Administration forPharmaceutical Affairs

Central Administration forEnvironmental Affairs

HACCP Committee-Adminis-tration for Disease Control

General Authority forStandardization

Egyptian EnvironmentalAffairs Agency

Egyptian Patent Office

Egyptian Geological Surveyand Mining Authority

Egyptian General Authorityfor Petroleum

The Governorate

Supreme Council forMonuments

National Centre for Cinema

Relevant Authority for Issuanceof Technical Licenses

General Authority for VeterinaryServices

Department of AnimalProduction Development

General Authority for Urbaniza-tion & Agricultural Development

General Authority for FisheriesDevelopment

LiaisonOfficer

LiaisonOfficer

LiaisonOfficer

LiaisonOfficer

LiaisonOfficer

LiaisonOfficer

LiaisonOfficer

No

LiaisonOfficer

LiaisonOfficer

LiaisonOfficer

LiaisonOfficer

LiaisonOfficer

LiaisonOfficer

Yes

Liaisonofficer

Liaisonofficer

Liaisonofficer

In-houseapproval?

22



Ministry of Irrigation

Ministry of Irrigation

Ministry of Communications andInformation Technology

Ministry of Education

Ministry of Defence

Ministry of Housing & UrbanCommunities

Ministry of Tourism

Ministry of Tourism

Ministry of Manpower

Ministry of Transport



Ministry of Electricity

Ministry of Civil Aviation

General Authority for RiverTransport

Administration of NileProtection

Administration of Irrigation

IT Industry DevelopmentAuthority

Administration of PreparingBooks for EducationalPurposes

Security

General Authority For theDevelopment of UrbanCommunities

Administration for LicensingTourist Establishments

General Authority for TourismDevelopment

Office of Issuance of WorkPermits for Foreigners

Maritime Transport Adminis-tration

Road & Bridge Authority

Electric Utility RegulatoryAgency

Civil Aviation Authority

LiaisonOfficer

LiaisonOfficer

LiaisonOfficer

No

No

Liaisonofficer

Liaisonofficer

Yes

Liaisonofficer

Yes

Liaisonofficer

Liaisonofficer

Yes

Liaisonofficer

In-houseapproval?

Total (Ministries) (22)Total (Affiliated Agencies) (52)Total (Yes ) (16)Total (No) (3)Total (Liaison Officer) (33)

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report on the implementation of the investment policy review egypt · 2012. 2. 14. · review of...

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